Nutella owner close to buying Nestle's US candy business for $2.8B

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Dive Brief:

Ferrero is close to buying Nestle's U.S. confectionary business for approximately $2.8 billion, according to Bloomberg. A deal could be finalized by this weekend.

Nestle put its U.S. candy business — including Crunch, Kit Kat, Baby Ruth and Butterfinger — on the block last summer as sales slumped, and the Swiss food maker signaled a desire to pivot away from chocolate in order to focus on faster-growing coffee products and pet food.

Ferrero, a family-owned chocolate company based in Italy, had not been very active in the M&A space until it acquired Fannie May and Ferrara last year. A deal with Nestle would push Ferrero's U.S. market share beyond its current 4.8%, Bloomberg said.

Dive Insight:

Nestle announced plans to sell its U.S. confectionery business last June, with slumping sales and a desire to consolidate and achieve cost savings as reasons for the decision. A company spokesperson told Food Dive that "rather than making the significant investment needed to become a leader in U.S. confectionery, it is the right time for [them] to focus on other growth opportunities."

While the U.S. is the company's largest market, selling the confectionary business would only affect 3% of its sales here. The Swiss firm would still have a dominant U.S. position in everything from bottled water and Lean Cuisine frozen meals to Nescafe coffee and Edy's ice cream.

Several suitors have reportedly displayed interest in Nestle's U.S. candy business. One potential buyer was Hershey, but it agreed last month to acquire Amplify Snack Brands for $1.6-billion, a move that further pushed it into portable chips, bars and cookies, and likely curtailed its interest in another deal. Mars and Lindt/Ghirardelli also were mentioned as possible buyers. Godiva's parent company, Pladis, passed on the deal in order to focus on making and selling premium chocolate.

Nestle currently is the fourth-largest U.S. chocolate producer with slightly less than a 5% market share, according to Statista. The U.S. candy business is fiercely competitive, with Hershey, the maker of Reese's, York Peppermint Patties and its namesake bar, along with Mars, whose roster of brands include Twix, Snickers and M&Ms, controlling nearly 75% of the market in 2016. With Nestle a distant player, the food giant was looking to divest the slower-growing business and focus its energy in areas such as coffee, pet care, infant nutrition and bottled water.

Euromonitor International estimated the volume of confectionery products sold worldwide rose just 0.5% in 2016-17 after falling for two years, according to Reuters. However, growth in the U.S. chocolate market — driven by demand for premium varieties and sugar-free and dark chocolate products — is expected to surpass the $30-billion mark by 2021, according to a 2016 TechSci Research report.

As for Ferrero, it has been undergoing numerous changes recently. It acquired Ferrara Candy, the maker of Brach's, Red Hots and Trolli, last year. ​It gained several assets through the estimated $1.25-billion deal, including four manufacturing plants, two distribution centers and an engineering and R&D facility. Together, these gave the Italian company a strong platform from which to expand in the U.S., making a Nestle purchase something they could more easily digest. It also allowed the company to gain a deeper understanding of the U.S. market before moving forward with an even bigger transaction.

The company's more assertive style may mirror that of Giovanni Ferrero, its CEO who has been running the 71-year-old family firm since 2011. According to The Wall Street Journal, he cut product launch times in half, bought U.K. chocolate company Thorntons PLC and brought in outside managers — all within 18 months. It would not be a surprise to see the firm use similar tactics with Nestle's U.S. candy business if it closes the deal.

"Tradition is like a bow," he told the newspaper in 2016. "The more we stretch the bowstring, the farther we can throw the arrows of modernity and innovation."

Ferrero currently ranks as the fourth-largest chocolate company in the world in terms of retail value. Given it's M&A pace of late, and with what sounds like a pending purchase of Nestle's well-known portfolio of U.S. chocolate brands, it wouldn't be surprising if the company soon expands its clout in the sweets space.